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Value-based Compensation for Continuous Improvement in Manufacturing

This is a great post. You’re gonna love this. It will challenge the very paradigm of how we run our factories from a standpoint of performance management and improvement. The concepts presented here are, by design, controversial, breakthrough, and disruptive. The ideas presented here define where the rubber hits the road for the Put Your Money Where Your Machine Is series of posts.

In Part 1 of this series titled Measuring Plant Performance by the Common Denominator in Business, we discussed measuring factory performance by cash gains and losses even at the individual shop floor operator level. Then feeding this information in real time to that operator so that he/she is always aware of how his/her decisions are impacting the bottom line.

In this post, we break the paradigm that was created at the beginning of the mass production era for managing and compensating employees and introduce a concept that is strikingly new, yet not new at all. It is the very engine that drives the most powerful economy in the world – the American economy. It is based on the principle that people can grow their personal wealth by working smarter and bringing greater value to the people they serve. It is based on the principle that the individual is in control of their destiny and they have the power to change their circumstances if they have the will to work for it and make it work for them.

The current compensation model:

The plant floor operator goes to work, punches the clock, puts in their hours, and goes home. They make the same amount of money regardless of what value they have created for the day. If they want to make more money, they can work a little slower (but still within the range of acceptable pace) and hope that they can snag a few overtime hours for some extra pay (at the expense of their personal time of course). Otherwise they can organize, negotiate, pray, and hope the company is kind enough to give them a pay increase or bonus for all of their trouble after an entire year. In other words, compensation has little to do with the value created by the employee, but how much of their life (time) gets sacrificed on behalf of the all mighty and powerful company. Even if they create no value at all, they still get paid the same; its not sustainable but believe me, it happens on various degrees every day. This creates a dynamic where there are just as many incentives to be inefficient as there are to be efficient. This also creates an environment that breeds complacency and inadvertently slows any efforts to drive process improvements that require behavior changes.

The Value Creation Model:

In the Value Creation Model (VCM), the operator would run their production line as if it were their independent business. It would adopt a model very similar to a franchise with opportunity to control your own earnings, but with a little more income security. After establishing and quantifying value in terms of cash, the company would establish a base pay (probably below what the employee would be compensated in the current model and below market rates) and they could earn a commission relative to the amount of value they created that day. For example, base pay might normally be $12/hr. In the VCM, base pay might be reduced to $9/hr but the employee could earn as much as $15/hr depending on the amount of value they created for the company that day. This ties compensation for the employee to compensation for the company as a whole. You don’t have to worry about the performance appraisal process because performance will be appraised daily by the system and compensation for the day will mirror contribution.

To take this concept of independent ownership further, a daily operating budged would be developed per production line. The operator would be responsible for delivering production targets within budget. Within this budget, there would be allowances for direct labor (the operator), maintenance or technical support, training, quality control, and any other support functions required to sustainably operate a production line. If the operator has a downtime issue, the incentive would be to quickly get to the root of the issue and repair it themselves to keep costs down. Otherwise, they have to “hire” a mechanic (internally) to help them with the issue, which comes out of their operating budget. Mechanics in the VCM would be compensated based on how many hours they spent “on hire” by an operator – in addition to their adjusted base pay. All other support personnel would operate in a similar fashion. At the end of the day, the operator would earn their base pay plus some portion of the unused operating budget. This model re-organizes the plant hierarchy with the operator on top and all other support resources to support the operator in providing as much value as possible to the customer. All quality and safety requirements would remain in place.

In the VCM, the incentives go from “work more hours” to “create more value“. At this point, continuous improvement becomes a path for the operator to increase their personal wealth, instead of a path for losing wealth or losing their job altogether. It shifts wealth from those who create little value, to those who create great value for the organization. This is the way the free market works and what makes the American economy the strongest in the world. This is a pivotal shift for implementing continuous improvement initiatives such as Lean and Six Sigma in American companies. In this model, the drive for individual prosperity would drive greater operating efficiency, bringing overall production costs down over time. Winners would stay and losers would leave for a higher base pay elsewhere. The idea is to create a self-correcting market where those who do not create value cannot thrive. This model also automatically right-sizes administrative overhead costs over time.

To implement such a system, a manufacturing efficiency expert such as those at Manuficient would help to develop the Business Case and create a compensation model that works within the company’s existing financial structure that incorporates incentives for daily continuous improvement. This would include employing the right mix of people, processes, and technology to make the VCM possible in your company.

I hope you find this post as fun as I did. Visit my Excelville Profile for tools and resources to support your continuous improvement efforts.